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Microsoft said on Sunday it proposed an alternative deal to Yahoo rather than a full acquisition.

Microsoft's statement on Sunday said it was "considering
and has raised with Yahoo an alternative that would
involve a transaction with Yahoo but not an acquisition
of all of Yahoo." It did not clarify what that
alternative might be.

The New York Times reported that Microsoft and Yahoo may
form a partnership or joint venture for search-related
advertising to take on Google, which dominates the
search market with a share significantly larger than a
combined Yahoo and Microsoft.

Yahoo continues to talk with Google about a search advertising partnership.

Microsoft emphasized it was not proposing to make a new
bid to buy all of Yahoo, after recently being rebuffed,
but could reconsider.

Yahoo replied later on Sunday that it continued to
consider a number of strategic alternatives and was "open
to pursuing any transaction which is in the best interest
of our stockholders."

The company's board will "evaluate each of our
alternatives, including any Microsoft proposal,
consistent with its fiduciary duties, with a focus on
maximizing stockholder value," Yahoo said in a statement.

It added it had confirmed with Microsoft that it was not
interested in "pursuing an acquisition of all of Yahoo at
this time."

Last week, financier Icahn launched a proxy campaign on Thursday to replace Yahoo's board with directors who would reopen talks with Microsoft, saying Yahoo had acted irrationally in refusing the giant software company's $47.5 billion bid.

Microsoft walked away from its pursuit of Yahoo two weeks
ago after three months of negotiations when Yahoo's board
rejected Microsoft's sweetened offer of $33 a share,
saying the company was worth at least $37 a share.